Five truths of business investment

Effective investment should form an integral part of any successful business plan. But investing as a business is vastly different from investing as an individual. Not only does success require due cognisance of the impact that such investment will have on other aspects of the business, it also demands the right combination of a number of factors that most individual investors would never need to think about, five of which I have outlined below:

Business investment is not the same as retail investment

Business investors need to avoid falling into the trap of thinking and planning like retail investors. The key factors most retail or individual investors need to consider is which asset classes are best suited to their risk and return preferences and will most effectively meet their long-term capital growth or income requirements. Whilst these are important considerations for a business investment, there is far more to it than that. A business also needs to consider the relationship between the investment it makes and the impact this will have on every aspect of its operations, particularly its cash flow. Which brings me to the next truth…

Cash flow is king

Any business investment decision needs to begin from the point of clearly understanding the cash flow requirements of that business. Cash flow is the lifeblood of any business, and if an investment made now has a negative impact on cash flow down the line, it simply cannot be considered a good investment, no matter what return it achieves. The simple truth is that before a business investment can be made, a clear understanding of that business’ cycles, and those of its industry, is required; as is an ability to accurately forecast its cash flow requirements against those cycles. A mistake here could prove extremely costly later on. Also, if your cash flow requirements are met, you can choose investment vehicles with longer investment periods, which translates into better overall returns.

Cash, on the other hand, isn’t

A failure to do proper cash flow forecasts usually results in a business choosing the apparently safer option of placing available funds into a cash-based vehicle, like a call account. At face value, this makes sense, particularly given the accessibility to capital that such an investment affords.

And it made even more sense two years back when the SARB repo rate was at 12% Unfortunately, that’s no longer the case, and with the SARB repo rate at 5.5% (and less every time the MPC announces another rate cut) your money definitely isn’t working hard enough for you. While cash investments undoubtedly have their benefits, they are not significant capital growth vehicles. So, if capital growth is what you’re after, it pays to optimize your cash, understand your cash flow, and invest where your money will deliver the best returns, for the longest possible time.

Choosing the right investment vehicle is vital

The vast majority of investment products on the market at the moment are aimed at the individual or retail investor. Most are designed against the backdrop of steadily declining interest rates and are price driven rather than tailored to the needs of individual investors. A business has very specific requirements of its investment, and unless the owner of that business has the expertise and time to make and manage his or her own investments, they are going to need to use an investment solution of some sort – and typical retail investment products are just not going to cut it. The successful business investor, therefore, is one who seeks out the most appropriate investment solution that is designed with business requirements in mind and enables optimisation of cash flow, variable investment terms and a customizable risk/ return profile.

Understand the markets (or partner with someone that does)

While a retail investor may get away (at least for a short while) with a short-term, return-chasing approach to investment, business investment requires a far better understanding of market trends in order to be truly effective. However, most business owners are experts in business, not investment, which makes partnering with an investment expert an essential requirement for success. Choosing the right investment partner is also essential. Not only do they need to have the infrastructure, expertise and ability to help you maximize your business investment, they should also be able to fully understand your business, help you manage your cash and accurately forecast and optimize your cash flow, provide insights into market trends, and offer the most appropriate investment solutions that can be tailored, over time, as market dynamics shift and your business requirements and objectives change.

In short, they need to give you the confidence that your business investment needs are being met, thereby freeing you up to focus on what you do best – run your business.